Grow Accounting | 45 Day Rule – Don’t Lose Your Franking Credits (2024)

FAQs

Grow Accounting | 45 Day Rule – Don’t Lose Your Franking Credits? ›

To be eligible for a tax offset for the franking credit you are required to hold the shares 'at risk' for at least 45 days (90 days for preference shares and not counting the day of acquisition or disposal). The holding period rule only needs to be satisfied once for each purchase of shares.

The 45 Day Rule, also known as the Holding Period Rule, requires resident taxpayers to continuously hold shares "at risk" for at least 45 days (90 days for preference shares, not including the day of acquisition or disposal) in order to be entitled to the Franking Credits as a franking tax offset.

Franking credits do not expire and may be used to offset tax liability in future tax returns.

Converting the excess franking offset into a tax loss

The amount of excess franking offset is converted into an equivalent amount of tax loss (by dividing the amount by the standard corporate tax rate).

Individuals and trusts will have excess franking credits refunded to them however, companies will not. Companies can still benefit by converting excess franking credits into carryforward losses – these are losses that are carried forward into a company's future years' net income to reduce their tax liability.

To be eligible for franking credits you must: Hold your shares for a minimum of 45 days, excluding the days of purchase and sale. Purchase the shares before the ex-dividend date. Be holding the shares on the ex-dividend date, although you can sell on this date.

The 45 day rule extends to a 90 day limit for preference shareholders, meaning that they do not qualify to claim franking credits in their tax returns unless they have held their preference shares for more than 90 days (plus purchase day and sale day).

For a company, excess franking credits are not refundable, but may be converted into an equivalent tax loss and carried forward to use in a subsequent income year.

The debit is equal to the franking credit attached to the distribution or the amount of tax refunded. The franking account is a rolling balance account, which means that the balance of the account rolls over from one income year to another. At any time the franking account can be either in surplus or deficit.

The franking credits are credited towards the tax payable by the investor, preventing the dividend income from being taxed twice.

Do franking credits roll over? ›

The balance of the franking account represents the amount of tax paid by the company that can be passed on to shareholders via franking credits attached to dividends. The balance of the account rolls forward from year to year and is not reset.

When are franking credits refunded to you? You can claim a tax refund if the franking credits you receive exceed the tax you have to pay. This is a refund of excess franking credits. You may receive a refund of the full amount of franking credits received even if you don't usually lodge a tax return.

The proposal looks to abolish the net refunding of franking credits, but franking credits themselves are not abolished. Australian investors can continue to use franking credits to offset income tax payable, they simply won't be able to receive a net refund of franking credits under the proposal.

What is the 45 Day Rule? Simply, this rule means if you purchase shares and receive a franked dividend you may lose the Franking Tax Offset if you do not hold the shares “at risk” for 45 days.

You convert the amount of excess franking offsets into a tax loss by dividing the excess franking offsets amount by the corporate tax rate, which gives you the tax loss amount.

If you are paid or credited franked dividends or non-share dividends (that is, they carry franking credits for which you are entitled to claim franking tax offsets) your assessable income includes both the amount of the dividends you were paid or credited, and the amount of franking credits attached to the dividends.

The holding period rule requires you to continuously hold shares 'at risk' for at least 45 days (90 days for certain preference shares) to be eligible for the franking tax offset.

Summary: New Tax Residency Rules Australia

If you spend fewer than 45 days in the country, you're not a resident of Australia. If you spend between 45 and 183 days in Australia, you must undertake the factor test. Any Australian citizen with a place to live, family, and economic interest in Australia is a resident.

The holding period of an investment is used to determine the taxing of capital gains or losses. A long-term holding period is one year or more with no expiration. Any investments that have a holding of less than one year will be short-term holds. The payment of dividends into an account will also have a holding period.

Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.